The Wall Street Journal Editorial on Gainful Employment

06/13/2012

President Obama likes to say that everyone in America should "play by the same rules." Okay, so then why does the Administration's new student-loan rule apply to for-profit colleges, but not nonprofits?

The regulations that go into effect in July cut off federal student aid to career and technical colleges whose former students don't meet the Education Department's definition of "gainful employment." Education programs would be cut off from the government trough if their former students don't meet one of three thresholds for three out of four years: They must have at least a 35% loan repayment rate, 30% debt-to-discretionary-income ratio, or 12% debt-to-annual earnings ratio.

The stated purpose of the regulations is to protect taxpayers. Fine. If the feds are going to subsidize higher education, it makes sense to attach strings to the taxpayer purse. If only the White House had been as scrupulous when it doled out billions to its for-profit friends in the green lobby. But then shouldn't the White House apply the same medicine to all colleges?

The Obama Administration argues that for-profits present a bigger risk. While they educate 12% of students, they receive a quarter of federal student aid and account for nearly half of loan defaults. However, career and technical schools also enroll a larger share of "high risk" students who are more likely to be poor, racial minorities, single parents and first-generation students. Studies that control for such factors find similar default rates among students at for-profits, community colleges and historically black colleges.

And therein lies the reason for the White House's disparate treatment. Were the White House to apply its rules to all schools, many historically black colleges and community colleges in the inner cities where wages are lower would also be barred from taking federal student aid. Traditional four-year colleges whose grads are employed occupying Wall Street could be affected as well.

At any rate, the White House's unstated goal is really to steer taxpayer money away from profit-making institutions to colleges with purportedly more noble aims (like ensuring gainful employment for academics). If the White House wanted to protect taxpayers, it would apply the standards broadly. Or even better, it would exit the student loan market, which it took over two years ago.

The Department of Education estimates that the federal government now stands behind about 90% of the $1 trillion in outstanding student debt, which is up by nearly $200 billion since 2009. Taxpayers also subsidize below-market interest rates on these loans. But notwithstanding Washington's fount of subsidies—and perhaps partly because of it—the student loan default rate is at its highest in over a decade.

If President Obama really cares about fairness, he'd level the regulatory field between career colleges and nonprofits and turn off the taxpayer spigot.